NIC,
Inc. (EGOV, $22.95): “Tech-Savvy and Firing on All Cylinders”
By:
Andy Reed, AIM Student at Marquette University
Disclosure:
The AIM Equity Fund currently holds this position. This article was written by
myself, and it expresses my own opinions. I am not receiving compensation for
it and I have no business relationship with any company whose stock is
mentioned in this article.
Summary
• NIC, Inc. (NASDAQ: EGOV) is a leading
provider of government web services. The company constructs and maintains
government websites. Operating through two segments, Outsourced Portals and
Software and Services, the company enters into long term contracts with state
and local partners. It then creates a web presence for the entity, and proceeds
to collect fees from the transactions that occur on the website.
• Q2 2016 was another
solid quarter for the company, reporting total revenue of $80.8mm, with
same-state portal revenue increasing at a 6% clip YoY.
• The company has
a refocused energy on its most profitable relationships which should help carry
this lean, mean, eGovernment machine through a period of responsible and
targeted growth.
• ‘Go Wild
Wisconsin’, a new one stop online shop for ‘Sconnies to register for fishing,
hunting and other outdoor activity licenses, continued its strong start
generating $600,000 in quarterly revenue even before hunting season kicked off
in earnest.
• The company reports
3Q earnings on November 3, and with solid drivers remaining in play (new
technologies, expanding breadth of services, etc.), we continue to see plenty
of upside in the Kansas-based eGovernment provider; however, investors will be
seeking positive indicators in the form of progress towards contract renewals.
Key points: Second quarter earnings came in at the
high end of street estimates at $.20 per share and $.22 ex-stock based
compensation expense. This compares with Q2 2015 earnings of $.19 per share.
Quarterly EBITDA for the period was $22.077mm growing at 5.84% YoY, dwarfed by the 29.25% Q1 EBITDA growth.
Results were mostly in line with street expectations; however, positive sales
growth and modest margin expansion came despite a change in revenue recognition
in Texas, which management estimates affected same-state revenue negatively by
300bps.
The company and
Chief Operating Officer, Robert Knapp, were featured in a CNNMoney News Story
during Q2 praising their goals of creating “tech-savvy” government agencies. It
is clear that NIC, Inc. is finally getting the attention it deserves. With more
state and local governments embracing cutting edge technology, NIC has proven
to be an invaluable technology partner and consultant. Just ask Utah,
Mississippi, or Maryland. Recently implemented, Mississippi and Utah have
integrated NIC’s technology into Amazon’s Echo voice assistant. NIC-enabled
Echo allows constituents to vocally access services and transactions through
the ‘Alexa’ speaker, a growing technology offering from Amazon. In Maryland,
one of the first government Apple Watch apps was unveiled and subsequently awarded
for its usability and practicality. There is no shortage of innovation at this
company!
As mentioned
previously, NIC has a rejuvenated and refocused attitude when it comes to its
government partners. Pinpointed as a weak link, Iowa’s contract was not
renewed. This is a good sign for the company, as it shed one of its least
profitable relationships and gives management the ability to continue to build
on same-state revenue streams by enhancing existing client value.
Despite the
stock’s strong performance since its addition into the AIM Equity Fund last
April, we still believe NIC, Inc. will continue to be a winner over the long
term. One of our biggest concerns with the original transaction was the fear
that important contracts could hit the expiration date without an agreement
upon renewal. While this thesis played out in Iowa, a portal partner since 1997,
the loss of the partnership “…will have no impact on our bottom line,”
according to CEO, Harry Herington.
What has the stock done lately? Since its addition
into the AIM Small Cap Fund on April 4, 2016, the stock is up 30%.
Interestingly, with a large run up in the spring months, the stock has
essentially remained flat throughout the dog days of the summer and now into
the fall, despite Q2 earnings coming in with a positive read on August 4.
Expect some pent up movement in the stock after Q3 earnings (street consensus
estimates: revenues of $80mm, EPS of $.18), as investors place their bets
heading straight into election week. NIC’s largest four largest shareholders
have significantly increased their stakes in the company over the past six
months.
Past Year Performance: Over the past
year, NIC, Inc.’s common stock is up 21% as of market close on October 31,
2016. The company has flirted with its 5-year high over the past several
months, and NIC, Inc. remains of strong importance to the Domestic Information
Technology portfolio. Even with its unprecedented marketplace positioning, the
company still only commands an EBITDA multiple of 16.8x vs. its 5-year high of
26.7x.
Source: FactSet
My Takeaway
As mentioned
previously, NIC, Inc. has outperformed the market since its addition into the
AIM Fund last spring. With that being said, the fundamental underpinnings
remain and hint at future success. Revenues continue to impress, and with more
and more value added services offered by the company, we see this trend
continuing. Management reiterated guidance on the most recent earnings call,
and went so far as to note that it is likely that with the tailwinds in the
industry currently, beating guidance is entirely in the realm of possibility.
NIC remains a stronghold in the portfolio, and we are looking forward to
watching the company end the fiscal year on a high note.
Source:
FactSet
